Envelopment Strategies in Platform Markets
Analysis of Hewlett-Packard Company
(2006-2011)
Author: Felix Rahmede
University of Twente
P.O. Box 217, 7500AE Enschede
The Netherlands
ABSTRACT:
Platform Markets are not a new phenomenon. However, it is companies like Google, Apple, Facebook and Amazon with their
enormous growth rates and vast market capitalization that fueled the interest of today’s scholars and practitioners. How do ICT
platform companies, such as these, innovate their business model over time in order to maximize profit? It is expected that
envelopment is one of the key aspects driving the innovation of business models in the ICT Platform industry. Eisenmann
(2011) laid the foundation for such an analysis with his typology of envelopment, which distinguishes three different kinds of
envelopment. However, he left open how and when which type of envelopment is best utilized in order to achieve long term
financial success. In order to capture this, this study has investigated the envelopment pattern of HP from 2006 to 2011 by
means of analyzing the introductions of new value propositions. This resulted in the finding of a correlation between the number
of markets enveloped and financial success. However, this correlation by itself is by no means generalizable! Only after
exposing the underlying envelopment strategy utilized by HP, generalizable conclusions could be drawn. After a comparison
of the findings with Müller (2015), two distinctive envelopment strategies for ICT platform companies, that lead to long term
financial success and sustainable envelopment, could be identified. Finally, an updated version of Müller’s (2015) Envelopment
Matrix has been derived, illustrating the two distinctive strategies that are expected to be valid for a wide spectrum of the ICT
platform Industry.
Supervisors:
Björn Kijl
Bart Nieuwenhuis
Keywords:
Business Model Innovation, Platform Markets, Value Proposition, Envelopment, ICT, Hewlett-Packard Company
Permission to make digital or hard copies of all or part of this work for personal or classroom use is granted without fee provided that copies
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7th IBA Bachelor Thesis Conference, July 1st, 2016, Enschede, The Netherlands.
Copyright 2016, University of Twente, The Faculty of Behavioural, Management and Social sciences.
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1. INTRODUCTION
1.1 Platform Markets in the 21st Century
“Uber, the world’s largest taxi company, owns no vehicles.
Facebook, the world’s most popular media owner, creates no
content. Alibaba, the most valuable retailer, has no inventory.
And Airbnb, the world’s largest accommodation provider,
owns no real estate. Something interesting is happening”
(Goodwin, 2015). What Tom Goodwin is referring to are
platform dynamics and their development, which indeed is a
captivating phenomenon that occupies today’s scholars around
the world.
Consumers around the world have long been in contact with
markets identified as platform markets or two-sided markets.
Prominent examples of these are gasoline stations, DVD rentals
or video games. These markets have experienced increased
attention in the last years due to the emergence of information
communication technology, which revealed the true potential
of platform markets. Google, Apple, Facebook and Amazon
(GAFA) are leading examples for harvesting this enormous
potential in the form of monetary value, by tapping into – and
developing new markets, capitalizing on network effects and
creating superior value. In January 2016 the GAFA companies
had a market capitalization of $1.7 trillion (Die Welt, 2016).
The fast growth rate and vast market value of companies
operating within this environment, among other factors, have
shifted the academic attention of scholars towards platform
markets (Sriram, et al., 2014; Gawer & Cusumano, 2008;
Cennamo & Santalo, 2013).
Furthermore, with people spending twice as much time online
as compared to ten years ago, with 16 to 24 year olds nearly
tripling their online time (Ofcom, 2016), the importance of ICT
is also growing and with it, its markets. In the last year it has
become evident that large ICT companies such as GAFA are at
open ’war’ with each other. These four giants have initially
founded their business in substantially different market
segments (online search; software & hardware; social media
and online retailing). However, they recently started leaving
their core market using innovative approaches, strategies and
business models to fight for market share and expand into each
other’s core markets (The Economist, 2012).
This war for dominant platforms and its underlying dynamics
in the ICT industry, call for an analysis of how ICT companies
innovate their business models to outcompete the other players
in the ICT industry (Visnjic, 2012).
1.2 Problem Statement
Gawer & Cusumano (2008) identified two strategic options or
approaches to fight for dominant platforms. Firstly, coring,
which is essentially the creation of a new platform where none
existed before. Secondly, and of high interest for this paper,
tipping, a way to win platform wars by building market
momentum. The key to this approach is to absorb and bundle
features of an adjacent market. “Tipping across markets occurs
when a company crosses over the boundary of its existing
market to absorb technical features from an adjacent market
and bundle them to extend the company’s platform” (Gawer &
Cusumano, 2008, p. 33). This method is called “bundling” or
“tying” and has been widely acknowledged by scholars as the
suitable and effective approach for attacking market share
especially of platform companies (Parker & Van Alstyne, 2005;
Rochet & Tirole, 2006; Rochet & Tirole, 2008; Gawer &
Cusumano, 2008; Eisenmann, Parker, & Van Alstyne, 2006;
Carlton & Waldman, 2002). Eisenmann et al. (2011) further
advanced this notion and developed the typology of
Envelopment Attacks. “Envelopment entails entry by one
platform provider into another’s market by bundling its own
platform’s functionality with that of the target’s so as to
leverage shared user relationships and common components”
(Eisenmann, Parker, & Van Alstyne, 2011, p. 1271). They
identified three types of envelopment. The Envelopment of
complements, the envelopment of weak substitutes, and
functionally unrelated envelopment with three conditions for
maximizing its chance of success: User overlap, price
discrimination benefits and economies of scope, respectively.
This typology lays a foundation to understand with which
mechanism ICT platform companies are attacking each other.
However, it is little more but a start to this process of
understanding. Eisenmann et al. (2011) have merely identified
the ‘who’ and ‘where’, but several other aspects remain
unknown. What is the essential reason for firms to start
envelopment attacks i.e. why do they envelop other markets?
What markets should a firm envelop? When is the right time to
do so? What is the effect of envelopment on company
performance? And most alluringly, how do firms envelop other
markets in practice? With this in mind it is apparent, that more
research in this area is required in order to gain deeper insights
about the envelopment practices of platform companies
(Visnjic, 2012). Is envelopment the underlying quintessence
behind the immense growth rate and prodigious profitability of
ICT platform companies such as GAFA? If yes, can significant
arguments be found that envelopment via product bundling is a
best practice approach in the ICT platform industry and how
substantial is the impact of the before mentioned conditions on
the success of envelopment?
1.3 Research Question
With regard to these questions, it becomes evident, that little
attention has been paid to the envelopment behavior in practice
of rival platforms in neighboring markets (Visnjic & Cennamo,
2013). Furthermore, the theoretical know how about
envelopment is still at a preliminary/infant state. In order to
gain deeper insights into the envelopment practices of ICT
companies acting in platform environments and in an attempt
to establish a link between scholars and practitioners in this
field, the following research question has been derived: How
do ICT platform companies innovate their value proposition
over time in the quest of maximizing profit?
In order to address the research question, this paper will use
data in an inductive, content based study approach. In more
detail, the press releases of Hewlett-Packard Company from
2006-2011 will be collected, and scoured for value
propositions. Said value propositions will be categorized with
the help of an updated layer model based on the ICT layer
model of Fransman (2010). Lastly, the data will be linked to
profit figures to enable an examination of the correlation
between envelopment practices and company performance.
1.4 Why HP
HP originated as an original equipment manufacturer of
computing hardware. However, these days are in the distant
past and today HP operates in complex platform markets spread
through different layers of the ICT industry. It is expected that
the innovation of their business model, i.e. the introduction of
new value propositions, throughout 2006-2011 is a major
indicator of the company’s revenue and that its effect on
profitability can be measured. This paper is part of a research
circle that analyses envelopment patterns and behavior of ICT
platform companies. The majority of this research has been
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targeting companies with a sole focus on software, applications
and content. However, companies that also manufacture
hardware got paid little attention so far. Nevertheless, the focus
will still be laid on software introductions, to assure
comparability. It is therefore assumed, that the results obtained
in this paper will increase the validity of the circle research,
when generalizing the results on the whole ICT industry.
1.5 Research Gap
In order to analyze the innovation of business models over time,
the term business model must first be clearly differentiated, as
it is often misused and falsely interpreted as a strategy or tactic
(Magretta, 2002; Shafer, Smith, & Linder, 2005; Al-Debei &
Avison, 2010; Casadesus-Masanell & Ricart, 2010; Teece,
2010). A clear definition of a business model, business model
innovation and the distinct role value propositions play in the
value creation and value capturing process will be arrived at.
This will enable an isolated investigation regarding the value
proposition innovation process, which is expected to serve as
an indicator of envelopment practices performed by ICT
companies.
Past publications on platform/two-sided markets have mainly
focused on the business environment, more specifically how
companies can make use of industry characteristics to their best
advantage. In order to give an overview, some of the most
prevailing literature in this domain is subsequently listed. The
Analysis of competition in platform markets (Shankar &
Bayus, 2003; Armstrong, Competition in two-sided markets,
2006). The explanation of the chicken & egg dilemma (Caillaud
& Jullien, 2003). The identification of strategic trade-offs in
platform markets (Cennamo & Santalo, 2013). The
examination of two-sided network effects direct and indirect
(Shankar & Bayus, 2003; Clements & Ohashi, 2005; Parker &
Van Alstyne, 2005). A discussion about platform envelopment
(Eisenmann, Parker, & Van Alstyne, 2011). Identification of
strategies for two-sided markets (Eisenmann, Parker, & Van
Alstyne, 2006). How companies become platform leaders
(Gawer & Cusumano, 2008). Success and failure in winnertake-all markets (Schilling, 2002). How to battle for
technological dominance (Suarez, 2004).
However, a specific analysis of how ICT platform companies
innovate their business model via new value propositions and
the isolated effect that has on company development and
monetary performance over time is lacking, as little attention
has been paid to competition emerging from rival platforms in
neighboring markets (Visnjic & Cennamo, 2013). Hence, this
analysis is expected to significantly contribute to an
understanding of the envelopment practices of ICT platform
companies.
1.7 Outline
The remainder of this thesis will be structured as follows. After
this introduction the theoretical framework will shed light on
the existing literature regarding business models, platform
markets and envelopment. After this a method section will
explain the gathering, organizing and coding of the data. In the
following analysis part, the data will be analyzed and
implications will be drawn. Lastly, a discussion section will
discuss the results and implications and draw conclusions.
2. THEORETICAL FRAMEWORK
2.1 Platform Markets
In traditional manufacturing environments, markets have a
bilateral structure. Merchant and customer linearly interact
with each other. In contrast, platform market exchanges are
trilateral. Meaning that there is not a linear relationship between
parties, but one of a triangular nature. Thus, platform markets
can be described as markets with triangular structure, where
users interact with each other as well as with platform providers
(Eisenmann, Parker, & Van Alstyne, 2011; Rochet & Tirole,
2006). Scholars refer to these markets, among others, as
platform markets, two-sided markets or two-sided platforms,
whereas two sided refers to the two different groups of users of
a platform. However, platform markets can also be multi sided
i.e. more than two distinct platform user groups (Rochet &
Tirole, 2006).
The triangular structure changes the fundamental nature of
business within platform markets. Identified as the academic
pioneers on two-sided platforms (Evans, 2006), Rochet &
Tirole later supposed “Conceptually, the theory of two-sided
markets is related to the theories of network externalities and of
(market or regulated) multi-product pricing” (Rochet & Tirole,
2006, p. 646).
As pricing is not of relevance for this paper, an elaboration of
multi-product pricing will be relinquished. Network effects or
network externalities are defined as the following: “Network
externalities are "positive consumption externalities," whereby
the value a user derives from a good increases with the number
of other users of the same or similar good” (Schilling, 2002, p.
387). The notion that platform markets are not only related but
driven and defined by network externalities is widely shared
and adopted among academic scholars. Moreover, network
externalities in platform markets do not only occur within one
user group, but across user groups (Sriram, et al., 2014;
Cennamo & Santalo, 2013; Eisenmann, Parker, & Van Alstyne,
2011; Gawer & Cusumano, 2008; Eisenmann, Parker, & Van
Alstyne, 2006; Armstrong, 2006; Parker & Van Alstyne, 2005).
Inferring, that one user group not only gains benefits if it is
growing, but most often gains benefits if the other user group
is growing. The growth of one user group is nothing else as the
growth of an installed base and of the other group typically
represents a form of (a) complementary good(s). Consequently,
it is evident, that the notion of network externalities within
platform markets is conjoined with Schilling’s (2002) early
emphasis on installed base and complementary goods within
platform markets. Moreover, modern scholars still agree with
this view. “A platform is simply more attractive the larger is the
base of consumers using it” (Mohagheghzadeh & Svahn, 2015)
2.2 Envelopment & ICT Layers
2.2.1 Envelopment
As elaborated in the problem statement, the most suitable way,
as identified by scholars, to fight for dominant platforms is
tipping across markets by bundling or tying (Rochet & Tirole,
2008; Gawer & Cusumano, 2008; Rochet & Tirole, 2006;
Eisenmann, Parker, & Van Alstyne, 2006; Parker & Van
Alstyne, 2005; Carlton & Waldman, 2002). The aim of
bundling is to create value that it is greater than the stand the
stand alone value of your competitor’s platform, as perceived
by the end user. This entails absorbing technical features from
another market and combine them together with features of
your own, thus, creating a bundle. To create superior value a
company integrates the functionality of its own platform with
that of the targets by leveraging shared user relationships and
common components. This act of attacking an adjacent
platforms market share is called envelopment (Eisenmann,
Parker, & Van Alstyne, 2011). A prominent example of
envelopment, is the addition gaming functionality by the iOS
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platform, swallowing the functionality of hand held gaming
platforms such as the PlayStation Portable (PSP) and the
Nintendo DS. Another example would be the addition of digital
photography to smartphones, by which they successfully
enveloped the market of digital cameras.
2.2.2 ICT Layers
When regarding ICT products, it becomes evident that they
occur at different levels (e.g. Hardware & Software). Thus, one
cannot simply categorize them as product or service like in
traditional market sectors but a more differentiated
categorization is required. Fransman (2010) developed a
taxonomy of ICT products categorizing them into different
layers enabling a more distinct analysis.
Exhibit 1: Fransman (2010); p.9
The four layers of the new ICT ecosystem are ordered in a
hierarchical manner. The first layer entails networked elements,
i.e. hardware/devices. The second layer is called "Converged
communication and content distribution networks", which is
essentially the connecting layer between hardware and
software. The third layer includes platforms, content and
applications, i.e. software. The fourth layer represents the final
consumer. The first and second layer are made up of physical
goods, necessary for the third layer to function and operate.
Yet, it is the third layer in which content is provided to the final
consumer. Therefore, it is no surprise that the third layer is the
focus and base for most envelopment attacks. In regard to
Zahavi & Lavie (2009), who created an extensive software
product classification (Appendix 1), and the importance the
third layer has for envelopment, it has been decided to further
subdivide the third layer into subcategories. This will enable a
more detailed and focused analysis of value propositions later
on.
Exhibit 2: Updated Layer Model Based
on Fransman (2010)
2.2.3 Envelopment Typology
This updated layer model with subcategorization enables a
deeper understanding of envelopment. However, before a more
thorough insight on envelopment can be gained, it is of
importance to first understand the nature of relationships
between platforms. Eisenmann et al. (2011) determined that
any two platforms have to be related in one of the following
three ways. They must be complements, substitutes or
functionally unrelated. Based on this, Eisenmann et al. (2011)
distinguished three different types of envelopment.
Platforms are usually organized in layers (SangiovanniVincentelli & Martin, 2001; Eisenmann, Parker, & Van
Alstyne, 2011). A single firm often dominates one layer on the
foundation of economies of scope. In order to gain a greater
share of the industry, a dominant firm in a layer oftentimes
launches envelopment attacks against adjacent layers. This is
called the envelopment of complementary goods and will forth
be referred to as type I envelopment. Type I envelopment is
most likely to succeed with a high overlap in user base of the
different layers (Eisenmann, Parker, & Van Alstyne, 2011).
Theoretically, the willingness to pay for a bundle of two perfect
substitutes would equal the price of either one of the substitutes
separately. In contrast to bundling perfect substitutes, the
bundling of weak substitutes creates value. This is because
weak substitutes serve an equal broad purpose but address
different kinds of specific user needs. With a small part of
consumers having both specific needs, an overlap to some
extend will be given. Consequently, a fraction of users will be
utilizing both substitutes. However, with only moderate overlap
of user bases, bundling by itself will not produce relevant gains.
The level at which a user values a bundle of weak substitutes
will only surpass the value of the preferred product if the other
product offers distinctive functionality. Therefore, it will be
required to vastly discount the bundle, offer distinctive
functionality or optimally both in order to sell it. This is called
the envelopment of weak subsites and will forth be referred to
as type II envelopment. To be able to realize these vast
discounts, the attacker has to realize significant economies of
scope. Accordingly, type II envelopment is most likely to
succeed when the attacker can realize significant economies of
scope (Eisenmann, Parker, & Van Alstyne, 2011).
Even with fundamentally differing purposes, such as mobile
phones and hand held gaming devices, two separate platforms
may still share common components and user overlap.
Leveraging these, the envelopment of such a fundamentally
different platform fuels convergence. This combines functions
of previously separate products into a single product, just as the
former example of iOS envelopment of hand held gaming
devices. This type of envelopment is called the envelopment of
unrelated platforms and forth will be referred to as type III
envelopment. If both platforms share a significant user base
overlap, there are ought to be opportunities for share gains by
bundling both platforms at a price that approximates the price
for the platforms sold separately. Usually functionally
unrelated platforms do not share common components. Some
however, e.g. phone and internet, do share common
components. In that case economies of scope can be realized.
Correspondingly, type III envelopment is most likely to
succeed when the platforms have significant user overlap and
when economies of scope are high (Eisenmann, Parker, & Van
Alstyne, 2011).
Eisenmann et al. (2011) defines conditions for each type of
envelopment, yet key questions for practitioners remain
unanswered. When is the right time to launch an envelopment
attack, or under which circumstances what type of envelopment
should be used? How does a growth strategy need to be
structured and incorporate envelopment in order to create long
term financial success and sustainable envelopment?
2.3 Business Model
There is lack of consensus between scholars about the
boundaries of business models. Besides, the concept of the
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business model itself is oftentimes used wrongly in literature
and moreover, interchangeably used with terms such as strategy
or tactic (Al-Debei & Avison, 2010; Casadesus-Masanell &
Ricart, 2010; Teece, 2010; Shafer, Smith, & Linder, 2005;
Magretta, 2002). This calls for a clarification of the concept of
a business model in order to set way for an isolated analysis of
business model innovation and its effect on company revenue.
A reason for this lack of consensus is because business models
are briskly updated and renewed in order to cope with today’s
fast moving business environment (Al-Debei & Avison, 2010).
At its core however, scholars reached consensus on the matter
that a business models is based on three main aspects. These
are value creation, value delivery and value capturing (Teece,
2010; Chesbrough & Rosenbloom, 2002; Amit & Zott, 2001).
innovate their business model over time in pursuit of
maximizing profit.
First of all, the differentiation between a business model,
strategy and tactic is to be determined. “Business Model refers
to the logic of the firm, the way it operates and how it creates
value for its stakeholders; and Strategy refers to the choice of
business model through which the firm will compete in the
marketplace; while Tactics refers to the residual choices open
to a firm by virtue of the business model it chooses to employ”
(Casadesus-Masanell & Ricart, 2010, p. 196). This clear cut
differentiation is ought to dismantle any further confusion
between the terms. However, the definition of a business model
by Casadesus-Masanell & Ricart may differentiate it from
tactics and strategy, but does not give a clear cut of what the
business model actually is. Chesbrough & Rosenbloom, in one
of the most cited articles on business models, define a business
model as following: “In the most basic sense, a business model
is the method of doing business by which a company can
sustain itself—that is, generate revenue. The business model
spells out how a company makes money by specifying where it
is positioned in the value chain” (Chesbrough & Rosenbloom,
2002, p. 533). This definition provides a solid foundation but is
not yet concrete enough for the purpose of this paper, as
platform companies often operate in value networks rather than
value chains. Zott & Amit provide an on point but yet
comprehensive definition of a business model that is seen as
suitable and appropriate for this paper: “A business model is
geared toward total value creation for all parties involved. It
lays the foundations for the focal firm’s value capture by codefining (along with the firm’s products and services) the
overall ‘size of the value pie,’ or the total value created in
transactions, which can be considered the upper limit of the
firm’s value capture potential” (Zott & Amit, 2010, p. 218).
3.1 Case Company HP
2.4 Business Model Innovation
As Zott & Amit’s (2010) definition of a business model has
been used and seen as appropriate for this paper, it is expedient
to also rely on them for a definition for business model
innovation. They defined business model innovations as:
“[D]esigning a modified or new activity system, rely[ing] on
recombining the existing resources of a firm and its partners,
and does not require significant investments in R&D” (Amit &
Zott, 2010, p. 2). At the core of this definition lies the
recombination of existing resources. That is fundamentally the
same core as envelopment, which at its essence also uses the
recombination of resources in order to attack adjacent platforms
(Eisenmann, Parker, & Van Alstyne, 2011). Hence, it is
concluded that envelopment is a specific form of business
model innovation used by platform companies, with value
propositions as a subset of business models. This reinforces the
procedure of this paper to analyze the envelopment behavior of
ICT platform companies by examining their value propositions
over time and thus, shed light on the way these companies
3. METHODOLOGY
The objective of this paper is to shed light on the phenomena
of platform envelopment by ICT companies in practice and
hence, reveal how these companies innovate their value
propositions over time in pursuit of maximizing their profit. In
order to do this, an inductive, content based case study has been
conducted. The chosen company in this setting is HewlettPackard Company. The following section will elaborate the
reasons why the given company have been chosen and give
insight into background, growth and profitability.
HP tells a fairy-tale story of entrepreneurship. It all started out
with a one car garage in Palo Alto, two electrical engineers and
an initial investment of $538. Initially HP produced a line of
electronic test equipment, today HP has revolutionized the
personal computer industry and is the second largest personal
computer vendor with 18.2 % market share in 2015. As one of
the only companies alongside apple in a comparative research
circle that is not solely focused on software, HP is expected to
gain valuable insights to enhance the understanding of
company’s envelopment practice that were active in platform
environments between 2006 and 2011.
As of 2011 HP was an ICT giant, operating in platform
environments, accumulating double figure billion-dollar gross
profit. HP posted a revenue growth of 38.7% from 2006 to 2011
with a gross profit growth of 33.8%. HP’s return on capital
invested ranged from 10.7% in 2010 to 16.8% in 2008. Key
figures for HP can be found in appendix 2.
It is expected that the fluctuations in profitability and growth
figures can be partly accounted for by differences in
envelopment behavior. As mentioned before this will be tested
by analyzing value propositions, i.e. product introductions, in
the given time frame. Concerning, external validity it has to be
admitted that by itself, this case study does not yield high
external validity. However, it is assumed that the chosen
company is highly representative for personal computer
vendors. As this study is part of a larger research circle,
analyzing envelopment in ICT platform environments, it will
however, substantially increase the generalizability of this
envelopment research. Henceforth, this paper will substantially
increase the external validity of the research circle.
3.2 Data Collection
In an attempt to capture the value created by HP between 2006
and 2011, a total of 566 new product introductions have been
analyzed and categorized. This includes new versions of
existing products. The required information has been deducted
from 2988 press releases. The primary source for these press
releases was the official company websites of HP. These
include external press releases but also news articles that are
published only on the company website. However, for some
time spans during the time of study, official website articles
were not available. In that case Factiva has been used as a
second source of information. Factiva is an online source of
information, that provides all press releases which are sent to
wires. Due to the fact that the press releases were gathered from
official company websites and Factiva, it is assumed that there
are no flaws in the data, which assures a high reliability for this
study.
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3.3 Data Analysis
To enable a thorough analysis of the gathered data, it first had
to be categorized. This was conducted in a four step process.
Firstly, basic at hand information about the new value
propositions have been directly extracted from press releases
and blog posts. Among this information was launch date,
company name, product name, product type and customer
classification. A table of this can be found in appendix 3.
Secondly, a product category has been determined. In this step
new value propositions will be classified as a product launch or
a new version of an existing product. Moreover, each new value
proposition has been categorized as one of the following:
Launched with partners, launched in a bundle or platform. This
is intended to verify that it was in fact envelopment, by which
HP attempted to maximize profit. An overview of this can be
found in appendix 3.
Thirdly, the new value propositions have been investigated
according to the updated layer model (see Exhibit 2) based on
Fransman (2010). This enabled a more elaborate understanding
of the ecosystem in which HP operates.
Fourthly, the software product classification of Zahavi & Lavie
(2009) has been used to further subcategorize software products
(see appendix 2). This was done to enable a retracement of the
markets these new products were ought to envelop.
Lastly, it is worth mentioning that all papers in the before
mentioned research circle have and will be ought to use this or
an almost identical four step process to classify new value
propositions. This will assure methodical rigor and thus, a high
external validity when combining research results to draw
generalized conclusions about the envelopment practices of
ICT platform companies.
The graph illustrates what has already been indicated in part
3.1. HP grew their revenue and gross profit relatively steadily
over the given time. Simultaneously HP’s return on capital, i.e.
profitability, fluctuated minorly with a maximum deviation of
3.6% from the starting value in 2006.
4. ANALYSIS
How do ICT platform companies innovate their business model
over time in order to maximize profit? In order address this
question this paper attempts to grasp the underlying logic of
value creation through new value propositions and thereby
further our understanding of platform envelopment.
The analysis of 2988 press releases published by HP revealed a
total of 566 new value propositions, 439 of which were new
versions, in the timeframe from 2006 until 2011. 240 of these
566 new value propositions have been classified as
categorizeable according to Zahavie and Lavie’s taxonomy
(2009). At this point it is important to be noted, that the
following analysis is solely based on this subset of 240. This
approach assures comparability to solely software based
companies in the given research circle. Nevertheless, it has to
be considered, that the financial data in exhibit 3 and all
subsequent sections of this paper is of HP as whole, i.e. not just
HP’s software business.
4.1 Markets Served
Firstly, to better understand the way in which HP creates value,
a look will be taken at customer classification and ICT layers
in which HP was active. Of the total 240 value propositions,
203 were aimed at the business to business (B2B) market, 21 at
the business to consumer (B2C) market and 16 were aimed at
both. Illustrated over the given time frame this looks as follows.
3.4 Testing for Growth and Profitability
As mentioned earlier the envelopment behavior of HP will be
examined through the lens of value proposition innovation over
time. Furthermore, to determine how envelopment effects the
growth and the profitability of HP the following measures have
been taken. Revenue and gross profit serve as an indicator for
growth. While revenue would be enough to determine growth,
it has been decided that adding gross profit as an indicator
increases accuracy and together with revenue provides a more
comprehensive overview of company growth. Return on capital
invested will serve as an indicator for profitability. Exhibit 3
displays the development of HP’s revenue, gross profit and
return on capital from 2006 until 2011.
Exhibit 4: Customer Segments HP
When regarding exhibit 4 it quickly becomes apparent, that
HP’s software portfolio is not consumer focused, as 85% of
software related value propositions were aimed at the B2B
market. Furthermore, with 72% of new value propositions
located on 4c (Application) in the ICT layer model (exhibit 2),
it can be identified as HP’s key focus. Mentionable are also 4d
(Service) with 11% and new value propositions ranging across
multiple layers including layer 1 (Device) at 12%. Thus, it is
concluded that HP’s software business is focused on
applications for the B2B market. Now that a better
understanding of how and for whom HP created value is
reached, the foundation for a more comprehensive analysis is
given.
4.1 Market Presence
Exhibit 3: Revenue, Gross Profit and Return on Capital of
HP from 2006-2011
Exhibit 5 illustrates the market presence of HP over time,
additionally displaying the number of core markets and the
number of markets enveloped.
5
caused by external factors. In order to understand the reason
behind this change of envelopment behavior, and assess if it
was in fact a consequence of external factors, this paper will
compare HP’s financial data with its envelopment data. It is
expected that this will enable a more thorough analysis of
events and macroeconomic factors that influenced HP in the
given time.
4.2 Envelopment and Financial Data
Exhibit 5: Market Presence of HP
The financial data in exhibit 4 points out, that in 2009 all of the
three chosen financial indicators experienced a downturn. This
by itself is nothing anomalistic. When plotted against HP’s
envelopment data however, something eccentric becomes
apparent.
Core markets are markets with a market presence of five or
more value propositions (Zahavi & Lavie, 2009). Markets that
have between two and four value propositions are forth
classified as intermediate markets. In exhibit 5, it is clearly
visible that while only having two core markets in 2006, HP
was active in a total of 12 markets. Moreover, out of 24 new
value propositions in 2006, 11 were located in two markets. The
remaining 13 value proposition were spread across 10 markets,
with eight markets only having one value proposition. These
markets with only one value proposition are forth classified as
experimental markets. Consequently, it can be said that HP had
a dispersed portfolio in 2006.
With six new markets entered, 2007 marks the year with the
highest rate of envelopment for HP. Three new markets were
enveloped as new experimental markets and one was
immediately enveloped with 6 value propositions as a new core
market. Out of the eight experimental markets in 2006, only
three remained experimental, as new value propositions were
introduced in the other five in 2007, strengthening HP’s
presence in these markets.
In 2008, HP further penetrated five of the six experimental
markets it had in 2007 advancing them to intermediate markets.
The other market has been dropped, as no new value
propositions were introduced over the time of study.
Additionally, one new market was enveloped on an
experimental basis. However, this marked was later dropped.
Envelopment behavior in 2008 was low, which is assumed to
have been a preparation for 2009.
Exhibit 6: Markets Presence & Revenue
Apparent at first sight, it is evident that HP’s revenue and
envelopment are positively correlated. A strong envelopment
behavior in 2007 is associated with a solid gain in revenue in
2007. Another strong envelopment phase took place in 2009,
this time however, the before declared positive correlation did
not cause revenue to increase. In fact, it is the only year in the
timeframe that revenue fell compared to the year before. This
is assumed to have an underlying cause. In order to confirm this
observation, HP’s market presence was also plotted against the
gross profit figures and against the profitability indicator return
on capital invested.
Building up to this, it was 2009 in which the most growth, in
terms of market presence, can be seen. In this year HP not only
expanded its market presence by penetrating four markets with
increased number of value propositions and thus, making them
core markets, but also enveloping four new markets. Three of
these markets were enveloped on an experimental basis.
Another observable phenomenon in exhibit 5 is the percentage
of total markets being core markets. In 2006 only 17% of HP’s
markets were core markets. In contrast, 2011 a formidable 50%
of HP’s markets were core markets. Furthermore, only two of
the 12 markets HP was active in 2006 did not become core
markets until 2011. Both of these markets were experimental
markets in 2006.
In 2010 and 2011 a strong deceleration of HP’s envelopment
behavior can be observed. In the two years combined HP only
enveloped a total of 3 new markets and only strengthen two of
its markets to core markets. Simultaneously, HP introduced
45% of its new value propositions in only three markets, further
leveraging their strongest markets. It is believed, that this ad
hoc change in envelopment behavior is ought to have been
Exhibit 7: Market Presence & Gross Profit
In exhibit 7, the same phenomena as in exhibit 6 is evident. A
positive correlation between markets enveloped and gross
profit is apparent, however does not hold up for the year 2009.
6
These occurrences ultimately resulted in a deterioration of HP’s
return on capital by almost a third from 15.4% in 2010 to 10.7%
in 2011.
Exhibit 8: Market Presence & Return on Capital
The positive correlation between return on capital and
envelopment is weak compared to the other financial
indicators. Nevertheless, it can be seen that the same
phenomena occurred along all financial indicators in 2009. So
why did financial results drop although an otherwise positive
correlation would suggest them to increase. The underlying
reason behind this are macroeconomic factors. 2009 was year
the global financial crisis hit and the world saw the S&P 500
index plunge by 18.6% between January 1st and the 27nd of
February, the worst start to a year in its history (Wikipedia,
2016). As previously mentioned, it is assumed that HP planned
a big expansion in 2009, like indicated by the envelopment
data. It is expected that this expansion turned out to be on a lot
smaller scale than planned by HP, due to this crisis.
Nevertheless, the increased envelopment positively impacted
the financial data, as the positive correlation would indicate. It
is expected that without this expansion, i.e. the largest number
of value propositions introduced in the time of study, the dip in
revenue, gross profit and return on capital would have been a
lot bigger.
This explanation of events goes hand in hand with HP’s
envelopment behavior in the two subsequent years. As
mentioned earlier, in 2010 and 2011 HP cut back on its
envelopment and really focused on its strongest markets, with
45% of new value propositions appearing in only 3 market
segments. In regard to the events in 2009 this seems very
feasible. HP recognized the crisis and its risks, and tried to
mitigate its consequences. This was done by cutting cost and
leveraging their strongest markets for maximum revenue and
profit. Mark V. Hurd, CEO of HP at the time acknowledged
this in his CEO letter to the shareholders in the annual report
for 2009. “In 2009, the global economy experienced the worst
recession in a generation…Beginning in our first fiscal quarter,
we had to address a rapidly deteriorating demand environment
across our product portfolio” (Hewlett-Packard Company,
2010, p. 2).
Nevertheless, the vast drop in return on capital invested i.e.
profitability, in 2011 is yet to be accounted for. This time
however, it is not a consequence of macroeconomic factors but
rather internal reasons that caused this disruption. Effective as
of 1st November 2015, Hewlett-Packard Company was split
into two publicly traded companies: HP Inc. and Hewlett
Packard Enterprise. Though this seems to be highly irrelevant
for HP’s profitability in 2011 at first sight, it did in fact have a
major impact on it. Jessica Scanlon, a writer for techradar,
identified that it was in fact 2011 in which the first inklings of
a possible split of HP occurred. Apotheker, CEO of HP at the
time, talked about the potential spin-off of HP’s personal
computer business, sending 'ripples' through the market
(Scanlon, 2015).
In the subsequent section, this paper is going to analyze what
envelopment approach HP has taken and compare that to the
envelopment approach of other ICT platform companies.
Before the discussion part of this paper begins, the following is
to be acknowledged. The financial crisis was a macroeconomic
incident and therefore, affected the vast majority of large
companies in the western world and forced them to adapt.
Hence, it is only logical that these factors have also affected the
companies who HP will be compared to in the subsequent
section. Consequently, no more specific attention will be paid
to factors being the consequence of the financial crisis.
5. ENVELOPMENT MATRIX
The envelopment behavior of HP has been reviewed in detail
in section 4.1. By itself however, these insights hold a limited
value for scholars and practitioners. This is why the results of
this paper will be compared and analyzed against the findings
of Christoph Müller (2015) using the envelopment typology
developed by Eisenmann (2011). This will uplift the small
external validity of this single case study analysis and enable a
more thorough analysis based on a comparative case study
approach. With this modus operandi this paper assures, that the
latter drawn conclusions are valid for a wider spectrum of the
ICT industry.
5.1 Comparison of Envelopment Strategies
Müller (2015) analyzed the envelopment approach of Google
and Yahoo. He has split his analysis in two phases labelled p1
and p2. P1 ranges from the firm’s inception until 2005 and p2
from 2006 until 2011. Even though the timeframe of this paper
only covers p2, it is believed that there are still valuable insights
to be gained from a comparison.
In 2006 HP’s software portfolio consisted of 24 new value
propositions in a total of 12 markets, with 2 core markets and 8
experimental markets. Accordingly, HP’s value portfolio was
dispersed and characterized by weak market presence. In
contrast, according to Müller (2015) Google’s value portfolio
in p1 was focused and characterized by increasing market
presence, while Yahoo also had a dispersed value portfolio with
weak market presence.
By 2010-2011 HP’s value portfolio was dispersed and
characterized by strong market presence, as their value
propositions stretched over 26 software markets by 2011 with
as many as 13 core markets. Yahoo however, had a focused
value portfolio in p2 with relatively strong market presence,
while Google’s value portfolio in p2 was dispersed and
characterized by strong market presence (Müller, 2015). At this
point the careful reader will have realized, that HP’s value
portfolio in 2006 was similar to Yahoo’s in p1. Nonetheless, in
2010-2011 HP’s value portfolio is fundamentally different than
Yahoo’s in p2, but is remarkably similar to Google’s value
portfolio in p2. In order to illustrate this, the Envelopment
Matrix of Müller (2015) was used, and the growth trajectories
of the three companies compared. The different growth paths
can be seen in exhibit 9.
7
of core competencies yahoo subsequently grew few core
markets and enveloped few markets. It is safe to say, that at this
point Yahoo had already lost to Google.
5.2.2 HP’s Way of Success
Exhibit 9: Envelopment Matrix based on Müller (2015) –
Illustrating Growth Trajectories of Google, Yahoo & HP
Müller (2015) concluded that the path taken by Google i.e.
Google’s envelopment strategy based on envelopment type I &
II, can be considered as a role model for the ICT platform
market. Moreover, the path taken by Yahoo initially based on
envelopment type III was considered to be 'not sustainable', not
resulting in revenue growth on the long term. Exhibit 9
however, tells a different story. The path taken by HP, and
therefore their envelopment strategy, is very similar to the one
intended by Yahoo, also relying in type III envelopment, yet
yielded comparable results to Google’s. The subsequent section
will investigate the underlying reasons behind HP’s success
with a strategy that was otherwise considered to not be
successful.
5.2 Success Factors for Envelopment
Yahoo started with a dispersed market portfolio and weak
market presence. Thereafter, Yahoo failed to increase its
market presence in its experimental markets leading to the big
drop visible in exhibit 9. HP started off in a very similar way.
Following this start HP did manage to increase its market
presence in its experimental markets, gaining market presence
while still having a dispersed value portfolio. How was this
possible for one but not the other? What were the underlying
factors? In order to gain these insights, a look will be taken for
the reason of Yahoo’s failure.
5.2.1 Reasons for Yahoo’s Failure
Extracted from Müller (2015) the three main reasons for
Yahoo’s failure have been identified. Firstly, Yahoo enveloped
unrelated markets with envelopment type III, by licensing core
technology from partners and bundling them with their own
service. While this saved Yahoo costs in terms of research and
development it had a major pitfall. It prevented Yahoo from
learning and developing competitive technology themselves.
This later caused them major difficulties to gain a substantial
foothold in these experimental markets. Secondly, Yahoo did
not have any strong markets. This created two problems for
them. They could not leverage user base and common
components from strong markets to experimental markets.
Additionally, it made Yahoo rely on their experimental markets
to produce profit. Thirdly, Yahoo has lost their core
competencies through a too high amount of unrelated
envelopment. By relying on third party technology to enter
these unrelated markets, Yahoo shifted too much of its focus on
services with which to bundle this third party technology,
neglecting their own capabilities in software development.
These led to the failure of Yahoo’s envelopment approach that
was based on the envelopment of unrelated markets and
resulted in a major strategy change that involved the dropping
of a majority of their markets. However, at this point the direct
competition from Google was already too strong. With a lack
Now that the reasons for Yahoo’s failure have been identified,
it is to be determined if and how HP avoided these. Firstly, HP
also enveloped unrelated markets based on envelopment type
III. On the contrary to Yahoo though, HP enveloped these
markets with value propositions based on their own technology.
This set up HP to learn and further develop their own
technology, which in turn improved the competitiveness of
their technology. This enabled HP to further penetrate their
experimental markets with subsequent value propositions
based on the technology used to enter the market. Thus,
strengthening their market presence. Secondly, HP did not have
strong markets either, which means they also could not leverage
user bases and common components. If one however, broadens
its scope of analysis, something quickly becomes apparent.
While not having strong markets related to their software
business, HP did have other business units collecting revenue
and profit through the sales of Hardware, such as their personal
computer business. This has two major implications. HP did not
have to rely on their experimental markets to quickly generate
profit. Additionally, HP had capital to invest in research and
development for their own technology, which enabled them to
envelop unrelated markets with their own technology. An
example of this would be HP’s envelopment of the personal life
style market with 'mscape' in 2007. Thirdly, even though HP
had a high amount of unrelated envelopment, they did so based
on their core competencies. What is meant by this, is that
contrary to Yahoo, HP did not envelop unrelated markets based
on third party technology but rather based on their own. Thus,
building their envelopment attacks on their core competencies
in innovation technology and research & development
capabilities. Innovation technology and research &
development capabilities have been identified as two of the
core competencies of HP (Jafri, Saxena, & Joshi, 2013). This
further strengthened the before mentioned core competencies.
Subsequently, this enabled them to grow more core markets and
envelop more markets.
This by no means discredits the statement by Müller (2015),
that Google’s envelopment strategy can be seen as a role model
path for the ICT industry. It does however, show that it is not
necessarily best practice and that there is another feasible
envelopment strategy coupled to a set of conditions.
5.2.3 Conditions for an Envelopment Strategy
based on the Envelopment of Unrelated Markets
Based on the envelopment path of HP, the following set
conditions have been identified for an envelopment strategy
characterized by a dispersed value portfolio and the
envelopment of unrelated markets i.e. type III envelopment. In
order to envelop unrelated markets with the outlook of long
term financial success a company has to:
1)
Enter existing or new unrelated markets based on their
own technology. This enables learning trajectories and the
development of technology to increase its competitiveness
and allows the company to further penetrate the unrelated
market with subsequent value propositions. Thus,
strengthening market presence. Two advantageous
approaches for this are coring and tipping, where coring
refers to the creation of new platforms and the latter to
tipping a market towards your company’s platform.
8
2)
3)
Have one or both of the following. A strong market from
which it can leverage user base and/or common
components. An unrelated business unit from which it can
leverage profit to finance research and development and
not be reliant on new markets to generate profit.
At all-time be aware about its core competencies,
strengthen and develop them. Furthermore, to envelop its
unrelated markets with subsequent value proposition to
gradually move to a value portfolio that is characterized
by strong market presence.
It is not said that if fulfilled these conditions will guarantee a
given company success with an envelopment strategy based on
the envelopment of unrelated markets. There is a collection of
other factors influencing the success on an envelopment
strategy, which have been discussed in section 2. Though, it
does show, that an alternative path to that of Google can yield
long term financial success. Furthermore, it is expected that this
alternative path is a lot less time demanding, because a
company does not have to build its core markets for several
years on this path, as Google did in theirs.
5.3 The Updated Envelopment Matrix
market segments. In this way the company is not dependent on
their newly enveloped experimental markets to rapidly generate
profit.
With a dispersed market presence and lot of experimental
markets, the facing challenge is to gain foothold in these
markets. Potential markets are now tried for their suitability
towards platforms dynamics e.g. the degree to which the
company could capitalize on network externalities and create
superior value. This phase is characterized by type I & II
envelopment. Experimental markets are further enveloped with
complementary goods and weak substitutes, making them to
intermediate markets. Simultaneously, markets that are related
to the newly enveloped unrelated markets, are enveloped using
envelopment type I & II. The guiding principle in this phase is
consolidation.
At this point, the company will have gained a distinctive idea
which markets are suitable for a platform strategy based on long
term success. These markets are now penetrated with a number
of subsequent value propositions, i.e. product introductions,
based one envelopment type I & II. Thus, strengthening the
company’s market presence. The guiding principle in this third
phase is strengthen. The underlying principle behind this is to
establish oneself as the leader of a given platform by market
dominance. Following is further expansion of the ecosystem
based on envelopment type I & II and the establishment of
coalitions, which will accelerate growth. Furthermore, it will
enable the company to leverage complementary platforms
towards the entrance of adjacent ICT layers with the ultimate
goal of supra-platform creation.
6. CONCLUSION
Exhibit 10: Updated Generic Envelopment Matrix Based
on Müller (2015)
The Updated Envelopment Matrix (exhibit 10) illustrates the
two identified strategies an ICT platform company can utilize
in order to generate long term financial success and possibly
achieve supra-platform envelopment. In the subsequent section
the two strategies will be explained.
Strategy I is based on the envelopment strategy utilized by
Google. It is centered around envelopment type I & II i.e. the
envelopment of complementary goods and weak substitutes. In
the beginning, this strategy is aimed at creating strong core
markets. From these markets the company will later be able to
leverage user base and common components. With the core
markets producing a substantial amount of profit, new adjacent
markets are enveloped. This is done by leveraging markets with
strong presence to further expand the core market base by
means of type I & II envelopment. An in depth fragmented
description of this strategy can be found in Müller (2015, p. 11).
Strategy II is based on the envelopment strategy utilized by HP.
It is centered around envelopment type III i.e. the envelopment
of unrelated markets. This strategy is characterized by a quick
aggressive approach that emphasizes the envelopment of
numerous experimental markets via type III envelopment. The
guiding principle in this first phase of strategy II is prompt
expansion. The cost for this diffusion based expansion are
ought to be carried by other business units or other profitable
Based on the three envelopment types identified by Eisenmann
(2011), two distinctive strategic approaches with the goal of
long term financial stability and success have been identified.
Categorization and Analysis of HP’s new value propositions in
the timeframe 2006-2011 revealed insights about the markets
HP serves, their market presence in these markets, their degree
of dispersion and ultimately their envelopment behavior over
time. Plotted against revenue, gross profit and return on capital,
a correlation between number of markets enveloped and
financial success became apparent. However, this is not
assumed to be a general correlation, but one that is highly
dependent on the trajectory of a firm’s envelopment approach.
To validate this, HP’s results i.e. the trajectory of their
envelopment strategy, has been compared to the findings of
Müller (2015), which is considered highly acclaimed in this
research circle about the innovation of business models in the
ICT platform industry. HP’s envelopment trajectory was
graphed against those of Yahoo and Google, by the means of
the envelopment matrix developed by Müller (2015). The
findings evinced two distinctive strategies that lead to long term
financial success and sustainable development.
Firstly, the strategy based on the envelopment strategy utilized
by Google centered around the envelopment of weak
substitutes and complementary goods, as already identified and
distinguished by Müller (2015). Secondly, a strategy based on
the attempted approach by Yahoo and utilized envelopment
strategy by HP. This newly identified envelopment strategy is
based on the envelopment of unrelated markets and is, just as
the first strategy, able to create long term financial success and
sustainable envelopment. However, there is a set of conditions
that need to be taken into account and are subsequently
summarized in short.
9
A company is required to: 1) Envelop unrelated markets based
on their own technology. 2) Be able to leverage capital from
other business units/market segments. 3) Work in coherence
with its core competencies.
Strategy I, i.e. the strategy based on Google, can be seen and
described as a role model strategy for the ICT platform
industry. Yet, it can no longer be acknowledged as sole best
practice. HP’s success with a fundamentally different strategy,
strategy II, based on a different kind of envelopment proved its
feasibility. However, it is to be taken into account that strategy
II is highly resource intensive. It is therefore concluded, that
strategy I is best suited for recently founded companies with
limited resources and limited access to capital. While strategy
II is better suited for conglomerates entering new market
segments, as it is expected to lead to long term financial success
more rapidly.
7. LIMITATIONS
The chosen research design of a single case study analysis has
been subject to a number of criticisms and bears a common set
of limitations, that are going to be discussed it this section.
Firstly, single case study analysis often lacks significant
methodological rigor. In the case of this paper, this fact can be
disregarded as the methodological framework used, is one that
has been established in 2015 and is adopted by the whole
research circle. Secondly, the most prominent critique of a
single case study analysis, is the issue of external validity or
generalizability. While the results from this paper alone hold a
low generalizability towards the whole ICT platform industry,
the comparison with other studies, and ultimately the
comparison with the whole research circle will yield high
external validity based on a variety case studies. Thirdly, the
aspect of researcher subjectivity. In a single case study analysis
researcher subjectivity is almost always an issue. Accordingly,
researcher subjectivity also threatens the reliability and
replicability of this study.
Additionally, a last limitation specific to the case company has
to be mentioned. Only 240 out of 566 new value propositions
from 2006 to 2011 launched by HP have been taken into
account in this case study. The financial data these were
compared to however, was not corrected for that, as there is no
specific financial data of HP’s software business. This is a
possible threat to the validity of this study.
8. FUTURE RESEARCH
To further improve the generalizability, i.e. external validity, of
the results of this paper, this study could be repeated using
different case companies.
Furthermore, it would be of high interest to illustrate the
envelopment path of other ICT platform companies on the
Envelopment Matrix and compare that to the two identified
envelopment strategies.
Finally, the future will show companies simultaneously
enveloping into each other’s markets. The described
phenomena are supra platform environments, which will see
the erosion of market boundaries. How are companies going to
innovate their business model in this new kind of competitive
environment? What role will envelopment play in this?
9. ACKNOWLEDGEMENTS
I would like to voice my gratitude towards my supervisor Ir. B.
Kijl for supporting me, providing me with feedback and
guidance throughout the process of my Bachelor.
10
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APPENDIX
Appendix 1:
Appendix 3:
Elements of the Analysis Scheme
Appendix 4:
Elements of the Analysis Scheme
Appendix 2:
Key Figures for HP
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